The Profitability Problem

The Profitability Problem

July 26, 2023

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This week we’re looking at interesting dilemmas.

Because trading is always throwing mental grenades at us.

In our last Newsletter, we saw the problem of a great, enduring strategy suddenly going through a bad stretch.

Today we’ll look at the opposite.

Here’s a simple strategy that I’ve been looking at on and off for over a decade. We’ll use the ES.D Futures chart again (like we did in our previous Newsletter).

ES.D 5-Minute Consecutive Ups

  • Start time: Between 10:20 am ET and 3 pm ET
  • Long Only entry: 3 consecutive positive bars
  • Filter: Must be above the 50-bar SMA
  • Profit: $750 per contract
  • Stop: $800 per contract
  • Exit: At end of the day if target or stop not hit

Here are some recent trades:

And here’s the big problem:

Do you see it?

No, it’s not the losing years. Almost every great strategy has losing years.

The big problem is the hypothetical high profitability of the past three years.

2021, 2022, and 2023 have been the most consecutive profitable years in the history of this strategy.

No other three-year period has even been close.

Yikes?

What do you think about that?

  • Is this strategy going parabolic? If so, we know what happens when things go parabolic.
  • Or is this strategy finally coming into its own in a the new market environment?
  • Are we simply in the middle of a long-term, super profitable trend?
  • Or should we take our wins and shut this down at the first bobble?

It’s a dilemma.

There’s a reason 70% of lottery winners give away all their money in three years. Winning periods can be worrisome and hard to take.

If we’re not prepared for it, a hugely winning period can be an angst-filled dilemma.

In our next Newsletter, we’ll look at one more mental mountain.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.